Car Finance Made Simple
If you are after a new car, but don't necessarily have the funds to cover it, you're going to need to secure some form of car finance - here's our quick guide to what financial help is available to you.
Step 1: Work out what you can afford
Only borrow what you need. If you can afford to pay for the majority of the car yourself, and are happy to put down a large deposit, then do so. Don't take out a loan covering the full cost of the car just because you can – cos it'll cost you in the long run. Think about over how long you want to repay the loan, and how much you are happy to pay each month. If you're after low monthly repayments you may be paying it off over a longer period or have more to pay in the final month. Think about how long you plan to have the car for before signing yourself up to a long agreement. And look at the typical APR – that's Annual Percentage Rate which is the cost of credit charged over the period of the loan.
Step 2: Consider the options
There are three main forms of finance available to you – Conditional Sale , commonly known as HP , Personal Contract Purchase, or Personal Lease
Step 3: Conditional sale
With conditional sale, you pay a deposit up front for the car. The balance plus interest and charges are repaid in equal amounts each month until you've paid for the whole thing. Once the final payment is made, the car belongs to you. This is great way of getting your hands on a new car without the need to part with the whole cost up front.
Step 4: Personal Contract Purchase
Personal Contract Purchase is similar to Hire purchase, in that you pay a deposit, usually around 10%, plus an agreed number of fixed monthly payments. The main difference is that the lender predicts what the car will be worth at the end of your agreement, and you only repay the capital difference between the two with interest. This means that as you are only financing a proportion of the car, your monthly payments tend to be lower. At the end of your agreement, you have three options:
i) You can part exchange the car for a new one.
ii) You can pay the amount the lender predicted your car would be worth at the end of the agreement, and own the car outright,
iii) Or you can return the car to the dealer, with nothing further to pay, subject to mileage and vehicle condition.
The benefits of this scheme are that you keep your monthly payments low, and have the opportunity to get a shiny new car every two or three years.
Step 5: Personal Lease
With a personal lease, you never actually own the car – you rent it long term until the end of the agreement, and then simply return it to the dealer, swapping it for a brand-spanking new one. Personal Lease is great if you don't want to worry about unforeseen costs, the car losing value over time, or selling the car. It's hassle free!
